Broken Energy Markets and the Downside of Hubbert’s Peak

A few commenters have mentioned peak oil recently. I am cautious about making forecasts and predictions and prefer instead to observe and document the data as the peak oil story unfolds. I have in fact published a couple of charts recently illustrating aspects of peak oil, one showing a possible peak in the rest of the world that excludes N America and OPEC (Figure 1). The other showing the undulating plateau in conventional crude + condensate that has persisted since 2005 (Figure 2). In my last post on oil price scenarios two of those showed global oil production capacity 1 to 2 Mbpd lower in 2016 than 2014. If that comes to fruition, will we have passed peak oil but does it matter?

Figure 1 Global oil production has been split into three geo-political categories: 1) USA and Canada, 2) OPEC and 3) the Rest of the World (RoW). RoW production bears the hallmarks of having peaked in the period 2005 to 2010 and this has consequences for oil prices, demand and prosperity in parts of the world, especially the OECD. Most of the growth in oil supply has been in the USA and Canada where the market has been flooded with expensive oil. Data are crude oil + condensate + natural gas liquids (C+C+NGL) and exclude biofuels and refinery gains that are included by the IEA in their total liquids number.

The current “low oil price crisis” is providing a clear and new perspective on the nature of the peak oil problem. If low price does indeed destroy high cost production capacity then this will raise the question if the high cost sources can ever be brought back? IF low price kills the shale industry can it come back from the dead?

Figure 2 Conventional crude oil + condensate production has been on an undulating plateau just over 73 million barrels per day (Mbpd) since May 2005, that is for almost 10 years and despite record high oil prices!  Note that chart is not zero scaled in order to amplify details. Click chart for large version.

The response of the oil price to scarcity in the period 2002 to 2008 was for it to shoot up. And the response of the energy industries to scarcity and high price was to develop high cost sources of energy – shale oil and gas and renewables. The longevity and permanence of these new initiatives has always been dependent upon our ability and willingness to pay. Of course, most of us who have cars continued to use them but have perhaps subliminally modified our behaviour through driving less or buying more fuel efficient vehicles. OECD oil consumption has at any rate been in decline and robust economic growth has been elusive. Is this due to the peak oil story unfolding?

The global finance and energy system is unfortunately rather more complex than that. The creation and expansion of debt is of course central to creating demand for oil and other energy sources. Without QE the global economy may have died in 2009 and demand for oil with it. Gail Tverberg produced an interesting chart that may illustrate this point (Figure 3). However, back in 2008 / 09 OPEC trimmed 4 Mbpd from their production and this equally explains why the price rebounded so strongly then. The end of QE3 may have contributed to the recent fall in demand, but the price has fallen so precipitously because OPEC has not compensated by reducing production.

Figure 3 QE appears to have impacted demand for oil and may have created the lines of credit enabling energy companies to produce high cost gas and oil at a loss. But the oil price has been equally controlled by OPEC controlling supply. Chart by Gail Tverberg.

The big picture is made even more complex by climate concern and a growing raft of energy policies in Europe and the USA designed to reduce CO2 emissions while singularly failing to do so meaningfully. And so at a time when clear engineering thinking was required on how to tackle the potential impacts on society of energy scarcity in the global economy we got instead ‘Green Thinking’.  Future generations will look back on this era with bewilderment.

Against this backdrop, I will now  move on to the main topic of this post which is the concept of broken markets and Hubbert’s peak. For those who do not know, Hubbert’s peak is peak oil by another name and while wise guys may want to invent a multitude of definitions I will stick to the simple definition of the month or year when global oil production reached a maximum volume or mass and thereafter went into inexorable decline. The impact of this on Mankind is normally expected to be negative since oil is the lifeblood of the global economy. The reason for this happening could be because we discovered something better than oil that substituted oil out of existence (that wouldn’t be bad) or because of scarcity oil became too expensive to produce (perhaps where we are now) or because Greens in government like Ed Davey and Barack Obama set out to undermine the fossil fuel industries which just a few years ago I would have found impossible to believe. We live in interesting times.

The world economy as we know it runs on fossil fuels and in particular a relatively small number of truly gigantic fossil fuel reserves such as the Ghawar oil field in Saudi Arabia, the Black Thunder coal field in Wyoming and the Groningen gas field in The Netherlands. Both Ghawar and Groningen are showing signs of age, along with the hundreds of other super giant fossil fuel deposits. The stored energy in these deposits flows out at enormous rate and at little financial or energy cost. It is these vast energy supplies and surpluses that provide the global economy with economic surplus. It is indeed the lifeblood. But the world has run out of these super giant deposits to exploit and we are finding it increasingly difficult to find large enough numbers of their smaller cousins to keep the wheels of the global economy well oiled 😉

The focus has thus turned to low grade resource plays. The resource plays offer near infinite amounts of energy but require large amounts of effort to gather that energy. The ERoEI is lower than what went before, perhaps much lower, but for so long as the energy return is positive, we have indeed learned that Man’s inventiveness and commitment can exploit these resources. One of the main questions I want to pose here is, is it possible for these resource plays to participate in the global economic system as it has existed for many decades that has become known to us as capitalism?

The first example of broken energy markets I want to look at is wind  power. Both onshore and in particular offshore wind are expensive forms of intermittent electricity. Wind advocates will argue that the intermittency does not matter and will point gleefully to the low electricity prices achieved when the wind blows strongly across Europe resulting in over-supply that dumps the price.  Wait a minute though, high cost and low price is a toxic mix that does not jive with capitalism. The more wind resource installed on the system the greater the size the unusable surplus and economic penalty becomes.

Why have the wind producers not gone out of business? It’s because the markets are rigged such the wind producers are given priority to market and receive a guaranteed price. This is a monopoly! The consumers don’t benefit because they have to pay the guaranteed price to the wind monopoly. The losses end up in the hands of the traditional generators who see their prices dumped and need to chew on the losses whilst providing the invaluable balancing services for free.

Providing back up services for when the wind doesn’t blow is another problem newly addressed in the UK with the new “capacity market”. The government is calling this a ‘market’ while it is in fact a component part of the wind monopoly. Companies are being paid to maintain generating capacity on stand by to cover periods when the wind doesn’t blow. Again the consumer has to foot the bill. One day quite soon, UK and other European governments are going to have to explain to their electorates why they have distorted the electricity market so badly, delivering a monopoly to wind producers, destroying the traditional market participants with the bill being met by the consumer who receives zero benefits. This can only be explained if it is underlain by rampant corruption or sheer stupidity.

The second example of a broken energy market I want to explore is the US shale industry.  This shares certain characteristics with the wind industry in that it is a high cost but potentially very large resource. But the mechanism for integration of this resource into the market is rather different. The problem with shale gas is that over-supply has resulted in the US gas price being dumped below the level where many shale operators can make a profit. Consumers in this case benefit through getting both secure and low priced gas. But the shale operators have reportedly racked up large losses that have been covered by expanding debt. These losses may yet come home to roost with the consumer if debt defaults result in a new credit crunch where the debts are socialised via government bailouts of the banking sector.

If it were possible to produce shale gas at $1 / million btus then everyone would be happy. Consumers would be getting secure and cheap energy and producers would be making handsome profits to distribute to shareholders. That is how capitalism is supposed to work. The system as it has operated seems broken.

US Light tight oil (LTO) production appears now to have created the same problem for the liquids plays where the entrance of expensive liquids in the market have contributed to the crash in the oil price. This has created risks for the LTO operators. It remains to be seen if the LTO sector sees mass insolvencies and default on loans that may socialise these losses. The introduction of high cost LTO has also undermined the whole of the higher cost component of the conventional oil sector. If LTO could be produced in large quantities for $20 / bbl then there would be no problem since this source would  go on to substitute for the higher cost conventional sources of supply. But with costs closer to $60-$80 this is not going to happen. The conundrum for capitalism is the introduction of large quantities of higher cost energy to the system.

At this point I have to admit that nuclear power may be subject to similar limitations. It is difficult to view the Hinkley Point new nuclear build in the UK as a triumph for the consumer or the country. A better way to manage such enormous capital expenditure on vital infrastructure is via the state. The costs may eventually be socialised to the tax payer, but at least the energy is reliable and amongst the safest forms of power generation ever developed and the taxation system distributes costs in an equitable way.

A form of society could undoubtedly exist powered by nuclear, wind and shale gas. But it would be a society supported by the state with far larger numbers working in the energy industries than now, producing lower surpluses, the energy production part perhaps running at a perennial loss. Those losses have to be covered by either higher price or via the taxation system. Either way, the brave new world that awaits us will be characterised as the time of less that will be in stark contrast to the time of plenty many of us enjoyed during the 20th Century.

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34 Responses to Broken Energy Markets and the Downside of Hubbert’s Peak

  1. Gary L Hunt says:

    It is time to give up on the peak oil theory. Technology disproved it and the shale revolution is real. Clearly low oil prices will impact shale producers just as they will conventional ones, but as you know oil prices go up as well as down. Current low prices seem to be driven more by geopolitics than fundamentals and thus can be expected to find equilibrium. In the meanwhile, the Saudi action has given the world a $330 billion Christmas gift or tax cut. Enjoy it while it lasts is my advice.

    • Euan Mearns says:

      You may or may not be correct Gary. The shale revolution is real in the USA, remains to be seen if it materialises anywhere else. I think the Russians and Chinese have had some success.

    • Ralph W says:

      This I call blind optimism or the panic of a share holder. The oil market has always been driven by geopolitics, and it was a major factor in the first world war, let alone the second. It may be more accurate to say that geopolitics has been very strongly influenced by the supply and distribution of crude oil for a century. To talk of a market for such a commodity is to be obtuse.

      Shale oil has changed the oil boom and bust cycle in one significant way – high capital cost and rapid decline rates will accelerate the impact of price on supply. It may just be fast enough for politicians and policy makers to join the dots and realise that oil is indeed a Liebig Minimum among the inputs to the global economy, and that a return to high oil prices after a supply collapse will be so rapid as to snuff out any GDP boost from the temporary return to cheap liquid energy.

      There is no affordable and scalable alternative to oil for our current installed industrial base and financial system. The investment needed to redesign our society around expensive oil would be massive and require zero real economic growth worldwide for decades, but more importantly it would require the ruling elite in each and every country to put the future of society before their concept of economic progress, and for that to happen at the very least they need to recognise that there is a problem, and no other possible solution.

      None of that is going to happen.

      • Leo Smith says:

        There is no affordable and scalable alternative to oil for our current installed industrial base and financial system.

        I disagree. There is, It’s not easy, but it does exist.

        When I started to review the technologies that exist, and the industrial processes and the uses to which fossil fuel is currently put, I was surprised at how much of what we do with fossil could be done with (nuclear) electricity,.

        Only off grid power – principally transport – is hard to convert.

        And there the transition price is the price at which synthetic hydrocarbon fuel becomes cheaper than drilled or mined..

        I’d estimate that at $200/bl…

        The analysis shows clearly that those nations that work hard to remove artificial barriers to nuclear power will live long and prosper, and those that don’t will suffer economic collapse. And deservedly so.

    • Leo Smith says:

      the concept of peak oil and peak population is valid in a finite world.

      There is no argument top be had as to of these things will occur, its merely a matter of how far we can kick the can down the road, and the advisability of doing so.

      As far as nuclear goes, there is ultimately no justification beyond window dressing to combine nuclear with intermittent renewables.

      All the arguments against nuclear are arguments against the technology itself, not the quantity it is deployed in. Once you decide to have it, you might as well have a lot of it to leverage the investment in fuel and waste management.. In a massively nuclear scenario intermittent renewables are simply a further amplification of the variable demand problem. I.e. they increase the necessity for dispatchable plant, they do not reduce it.

      The last thing you want with a substantial nuclear baseload, is intermittent renewables.

      I think that this will lead ultimately to two basic approaches to power generation. Places with a lot of dispatchable renewable capacity – basically hydroelectricity – can expand their grids by using either intermittent renewables or nuclear, although nuclear is the cheaper option.

      Those without serious hydro to balance the flows are stuck with using fossil – particularly gas – to cover dispatch. In such a scenario, the greater variability of wind and solar, and its increase cost with respect to nuclear, make the only sane option nuclear for baseload and renewables for the museum.

      The great white hope of Storage is chimera. Storage is of course the answer to everything in terms of matching supply and demand BUT its also the panacea for nuclear, and whatever the storage costs, the fact that nuclear is cheaper than renewables and needs less storage means that nuclear plus storage is always better than renewables plus storage.

      I have considered these problems in depth, and conclude that peak oil will, once politics runs out of someone else’s money to fund renewables, happen because of market forces. In essence solutions based on nuclear electricity will out compete those based on at least oil and in the longer term, coal.

      I have summarised the arguments here:

      Now it should be clearly understood that these arguments are based on rational engineering and physics, and not on irrational politics and marketing: I hold to that because although its true that politics and populations can remain irrational for enormous lengths of time, they cannot do so forever.

      Especially if someone breaks rank first, as India and China are doing.

      • Paul says:

        Is nuclear really cheaper than renewables? Hinkley C is horribly expensive and while it might be possible to find cheaper new build elsewhere in the world, in the UK, the true price is what is being paid for Hinkley C. I imagine it will need extra backup too (the grid can currently accommodate (from memory) something like 1400MW of supply dropping off. Hinkley will I think be 2 X 1600 and if they both go offline at the same time there will need to be a great increase in backup supply.

        • A C Osborn says:

          Hinkley C is only horribly expensive because of renewables distorting the Market.
          Nobody wants to invest in expensive long term projects when priority is given to it’s opposition, so they need safeguards built in, including a matching subsidy to Wind power.
          The difference is Nuclear provides power 24/7/365 for about 40 years, with occassional PLANNED breaks for maintenance.

          • Paul says:

            Wiki gives the construction cost at an estimated £24.5 billion. I don’t know the provenance of that figure but a simple reading is that it will cost that huge amount just to build it. Renewables don’t obviously affect construction costs.

            Nothing produces 24/7/365. Reactors do go offline unexpectedly from time to time (some UK ones are offline now I think), so they clearly need backup for such events.

          • A C Osborn says:

            Perhaps you would like to read this article of why it costs so much to build Nuclear Reactors, it has very little to with the actual Construction Costs as it does with bureaucratic costs.
            It also shows the overall generation costs for the different types of generation, but does not include the cost of “Backup” for renewables.

          • Paul says:

            You are right of course. If we could build nuclear reactors with no regulatory oversight and no safety rules it would be much cheaper. Similarly, if I could just erect a 120m wind turbine in my back garden over the complaints of my neighbours, that would probably be cheap too. We can’t however, and I for one and glad about that.

            We have to consider the world as it is, not the world as we’d like it to be. Nuclear in the UK does cost a lot of money, it does sometimes fail (which is why there are those safety rules) and it does need backup. It would be lovely if those weren’t true, but…

          • Leo Smith says:

            No. Hinkley point is expensive mostly because of regulatory ratcheting.

            You should read this online e-book for real analysis of why the nuclear industry has got monumentally expensive since the mains stream media started vilifying it.


        • Leo Smith says:

          Yes: see here for comparison – even vastly inflated new nuclear with all its red tape is cheaper than wind or solar.

          And its worth more, as it is reliable. You dont need to back it up with (as much) emergency peak demand capacity.

          And it doesn’t impose as much stress on the gas burners as renewables. That is a subtle point covered in my limitations of renewables paper. The EXTRA cost burden the CCGT suppliers carry by having to be there, but not getting to run as often, is about 2p a unit over and above the cost off the renewable source itself.
          We pay three times for renewables

          – the cost of the renewable energy when its there.
          – the cost of maintaining a higher capacity grid than we need to accept it when its running hard (or pay constraint payments when the grid cant handle it).
          – the cost of maintaining gas plant that doesn’t generate as much electricity as it used to, because wind and solar displace it, but which is still needed when wind and solar fail to deliver.

          All of these add cost to renewable energy that is not borne by renewable operators: Its borne by the rest of the grid and power stations, and it leads to further price increases.

          • Paul says:

            Your book link didn’t work (maybe temporary). I’m in favour of nuclear. But the nuclear I want is the sort I can live down the road from (instead of having to be located miles from anyone) without worrying about it melting down and/or irradiating the neighbourhood. And the sort that is relatively small with flexible output (not binary, on/off), has end of life disposal well planned in advance and waste disposal taken care of safely. The nuclear industry has had half a century to get to that point and yet seems to have gone in the opposite direction and what is delivered is Hinkley C.

            For all its problems, renewable generation is safe, can be put anywhere and has no fuel costs. It needs more backup than conventional or nuclear but let’s not pretend that they need no backup. The existing system is hardly ideal with 70-80GW of capacity half of which is routinely offline because we normally need only 30-40GW and only occasionally hit 60. It is also a system in flux – as renewables replace conventional, EVs and other electrification add demand and potentially storage, demand management and new battery regulation and storage technologies are added – all of which modify the demand profile. If there was ever a time when we could say the system is optimal and we should leave it alone, this isn’t it.

          • Euan Mearns says:

            For all its problems, renewable generation is safe, can be put anywhere and has no fuel costs.

            This is simply untrue. There are energy costs involved in manufacture of renewable devices and for example in deploying solar panels in Scotland, its unlikely that the original energy invested will ever be recovered. Renewables need to be deployed giving highest regard for their suitability to particular areas. The Banqiao Reservoir Dam burst of 1975 killed 171,000 people…


          • Paul says:

            This is simply untrue.

            Even by quoting me out of context (I said renewables could be put anywhere while discussing the siting of nuclear – see my comment Dec 23, 5.24pm), you still miss the target 😉 It is clearly true that solar *can* be installed in Scotland and it can even make sense for some uses (solar thermal for domestic hot water). Do you think I was claiming that every renewable technology is a sensible choice in every possible location (wave power in the desert, solar underground, wind in space)?

            Dam failures are indeed tragic, but hydro clearly cannot be installed just anywhere and it does not impose extra costs (as Leo’s post was discussing). So it seems irrelevant to that discussion.

    • sam Taylor says:

      New drilling technology has no more disproven the concept of peak oil than powered flight disproved gravity. Unless we’ve somehow tapped into an infinite source of high eroi hydrocarbons.

  2. Dave Rutledge says:

    Hi Euan,

    “Without QE the global economy may have died in 2009”

    QE has been great for my stock investments, and because of that the California and Federal tax man like me too. I am skeptical that it has helped the rest of society any.

    We will now get to test Arthur Berman’s theories about who is making money and who isn’t in the oil and gas patch.

    Merry Christmas to you and Kathryn and thanks to you and Roger for all your posts. We are off to visit the Texas relatives.


    • Euan Mearns says:

      Hi Dave, have a good one. We are at home with “the kids” and Kathryn’s parents. Can’t imagine Christmas in Texas. Maybe you get some snow? 2015 promises to be interesting in more ways than one. Say hi to Dale.


      • Dave Rutledge says:

        Hi Euan,

        “Can’t imagine Christmas in Texas.”

        I will send a picture of the Barnett Shale gas pads near my sister’s house. They are in the middle of a small ranch for teaching girls to ride horses. That will give the flavor.


        • aslangeo says:

          Jobs in the American oil patch

          article in zero hedge

          key points

          O&G jobs grown 40% since 2008 (400,000 people direct , 2MM indirect)
          These are high wage jobs – in Texas wages in Shale counties are 50% larger than non-shale

          “The $300–$400 billion overall annual economic gain from the oil & gas boom has been greater than the average annual GDP growth of $200–$300 billion in recent years—in other words, the economy would have continued in recession if it were not for the unplanned expansion of the oil & gas sector.

          “Hydrocarbon jobs have provided a greater single boost to the U.S. economy than any other sector, without requiring any special taxpayer subsidies—instead generating tax receipts from individual incomes and business growth”.

          All of this is now at risk – how much will survive and at what shape??

          С новом годом, с новом счастыем (happy new year in Russian)

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  4. Javier says:

    There are several problems not addressed with any downside scenario.

    1) Peak exports was at least 7 years ago, and since then some net importers have seen their share of oil reduced as much as 25%, while others have increased theirs (China and India mainly). Diminishing oil is not going to be divided proportionally, some will get a lot and some will get almost none. This effect inevitably leads to the killing of globalisation and a huge debt crisis that has the potential to topple the monetary system.

    2) The downside is also made steeper by the export land model. Saudi Arabia is still growing its oil per capita consumption. Exporters will keep as much as they wish, increasing the chances of geopolitical conflict.

    3) The downside is also made steeper by the energy trap model. More and more of the oil will have to be directed to ensure our energy production, making the decline on our economy much worse.

    Giving all the above, collapse appears as a real possibility.

  5. G. Watkins says:

    Thanks for all your efforts.Merry Xmas to you and Roger in particular plus all the knowledgeable contributors. I learn a little something every visit.

  6. edboyle says:

    So if fossil fuels still exist but we can’t afford them in trrms of private enterprise will it become a state utility? The investment in rid, roads,etc. can’t be written off because the basis of industrial capitalism i.e. tech-energy-finance matrix is unstable so govt. control stabilizes the whole thing rationing enrgy, money till it all runs out.

  7. davekimble3 says:

    All this talk about the financial cost of fossil/nuclear/wind misses an important point – what matters is the ENERGY that has to be spent up front on new generating infrastructure and the machinery to use it, and the time gap till that energy is repaid and net energy profit starts.

    This energy gap has to be filled by our current energy mix (mostly fossil), over and above that needed to keep the global economy running and growing. There is still some slack in the system, so we can certainly use fossil fuels to make a start on the transformation away from fossil fuels, but there will come a time when Peak Fossils will impose a choice as to whether we keep building more nuclear/wind/solar or keep industrial civilisation running. The complete transition away from fossils can no longer be achieved – we should have started 3 decades ago.

    This can be demonstrated by constructing a spreadsheet showing the next 50 years or so of Energy Invested and Energy Returned of the world energy mix as it evolves over time. It is not until people have convinced themselves that the complete transformation cannot be achieved that we can start to look sensibly at what is best to do under the circumstances. Nobody is doing this at the moment because everyone is still stuck in pre-Peak Fossils thinking, where anything is possible if you have enough money.

  8. BAU says:

    Hey Euan, since you mention the Groningen field and you have before in relation to EU gas security; Recently there has been a small earthquake in the main city in the North, which got folks extra on edge again. So they are planning to cut some more on top of the cuts planned in the beginning of this year. It’s bound to influence exports some more I guess. Plus another 700 million they gotta scrape from their citizens 🙂

    merry xmas

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